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Re-invention for digital leadership

How to be an agile giant

A tale of proactive self-disruption in financial services

Barclays is 325 years old. It has operations in over 40 countries, and employs approximately 120,000 people. How does a company this big and long-established approach digital disruption? The answer is proactively.

Barclays has something of a history of firsts. In 1966 it launched the UK’s first credit card, and the world’s first ATM the following year. In 2007, it launched the UK’s first contactless payment card, and then in 2012, the highly successful mobile wallet, Pingit.i

Barclays’ approach is to move boldly, before it needs to. To not be afraid of doing things that will disrupt its own traditional business. To proactively create new services and business models, and repeatedly improve the customer experience.

Barclays’ story

The GAFA threat

According to a Summer 2017 study, high street banks face a growing threat from technology giants, with 57% of retail bank IT directors believing that GAFA (Google, Apple, Facebook, and Amazon) companies will enter the UK retail banking sector within five years.ii

Google’s peer-to-peer payment service, Google Wallet; Apple’s mobile payment and digital wallet, ApplePay; Facebook’s Payments service that allows you to pay for things on Facebook or in Messenger; online payments processing service Amazon Pay – they all give traditional banks cause for concern.

These marketplaces are where people are spending their time and interacting with one another, and now traditional banking relationships could very quickly be disintermediated.

The Pingit response

In 2012 Barclays launched Pingit, the UK’s first person-to-person service for sending and receiving money using mobile phone numbers.iii Later that year they also launched their award-winning Mobile Banking app. In July 2015, Barclays teamed up with Zapp to allow Pingit to be used at point-of-sale terminals in shops. Pingit is connected with Barclays’ normal online banking website so that it can be integrated into the conventional banking process.

The initiative was led by Shaygan Kheradpir, the then COO of Barclays’ Global Retail and Business Bank.iv He set up a team of just 100 developers, who used agile DevOps methods and grid computing resources to launch Pingit to market in a remarkably short space of time.

With Pingit, Barclays created their own mobile payments marketplace. It sits outside the Visa and Mastercard schemes, enabling Barclays to collect detailed transactional and peer-to-peer data on mobile payment patterns that they would not otherwise have had access to.

By doing this they also ensured that in future, the interchange payments that they receive for every transaction wouldn’t be diluted by payments intermediators like ApplePay. Barclays basically said: ‘I’m not going to share my profit with the disruptors – I’m going to build my own model.’

Of course, Pingit was a competitor to Barclays’ own traditional payments business, but the strategy at the time was to deliberately carve away at other parts of the bank by building more of these alternative digital models. The approach was to avoid a wholesale transformation of the legacy IT and business models and to build component solutions around Barclays and gradually transition towards them.

Accelerator programme

Barclays continued to evolve and have since launched an accelerator programme for fintech start-ups with locations in London, New York, Tel Aviv, and Cape Town. They offer an intensive 13-week programme of mentoring and guidance, with the possibility of up to USD 120,000 investment from their partner Techstars, and the opportunity to pitch to the financial community.v

One of the rising stars who graduated from the programme in 2015 was Israeli start-up Wave, which is applying blockchain technology to the world of international trade. Their platform connects all players in the international supply chain: shipping lines, banks, freight forwarders, commodities traders, and other parties. By using decentralised blockchain technology, the connection between parties is a direct, peer-to-peer one, which does not need to pass through a central clearing authority. Documentation is secure, and it’s claimed to be cheaper and more streamlined than existing models.vi

In September 2016, Barclays and Wave announced that they had executed the first international trade finance transaction using blockchain technology. It’s a significant milestone when a technology matures from lab, through pilot, to real-life market transactions. In Wave, Barclays appear to have identified a partner with the potential to drive transformation in the global market for value exchange – this time through the accelerator programme, as opposed to developing it themselves.

Virtualisation strategy

A further great example of how Barclays are boldly embracing digital is in their strategy for Africa. Barclays Africa currently operates across 12 countries in Africa and employs 45,000 people in over 1,260 branches. However, they've recently started a move out of physical operations and are going totally virtual.vii

The bank’s strategy involves selling its 62% stake in Barclays Africa whilst building new capabilities that will enable them to be relevant in the future, particularly around a new digital mobile banking model.

Effectively, Barclays will be launching a virtual bank across Africa. It will operate at 10% of the current cost, and cost customers 10% of typical banking services. The strategy is to ‘bank the billion unbanked’ – clearly a bold strategy for a bank that currently has 12 million customers which represents just 1% of the African population.

Stephen van Coller, Barclays Africa's chief executive for corporate and investment banking, comments ‘we are building an entirely new bank, a "virtual bank" that will strip out legacy costs and offer new products and services, such as faster, cheaper payments, tailored to the needs of people at "the bottom of the pyramid”.’viii

We are building an entirely new bank, a "virtual bank" that will strip out legacy costs and offer new products and services.

In parallel, Barclays are experimenting with models like M-Pesa, seeing if they could take it global. For the uninitiated, the M stands for mobile, and Pesa is Swahili for money; one of the world’s most successful mobile services for money transfer, financing, and microfinancing, launched in 2007, since expanded to South Africa.

Barclays’ African strategy is strongly focused on the incubation of mobile payment schemes and they appear to be thinking: if we can get micro-digital on mobile right in Africa, we can take it anywhere.

The wider issue

As part of a recent informal survey, Dimension Data asked our clients what was driving their digital transformation.

Some 29% said they wanted to get ahead of changes in their industry; 25% were exploring alternate business models; while 23% said they were changing because their customers are changing.

This reflects the ambitious, proactive attitude with which incumbents in financial services are reinventing themselves for the digital age.

Acting boldly…

And in their Incumbent’s Guide to Digital Disruption, McKinsey explain that ‘incumbents often find themselves on the wrong side of a big trend… No matter how strong their balance sheets and market share – and sometimes because of those very factors – incumbents can’t seem to hold back the tide.’

They say the secret of incumbents that thrive in the face of potentially disruptive forces is ‘Acuity of foresight and a willingness to respond boldly before it’s too late – which usually means acting before it is obvious you have to do so.’ And doing so with initiatives that directly compete against their traditional business. ‘Companies rarely die from moving too fast, and they frequently die from moving too slowly.’ix

And it's clear from both of these points that the Barclays story is a great example. They were proactive and pre-emptive. They could see the future coming and made bold moves before they were forced to. They actively developed initiatives which would compete against their own traditional business streams, preferring to disrupt themselves than wait to have others disrupt them.

Our opinion

Think beyond technology

The technological innovation agenda today is focused increasingly on the use of machine learning, cognitive systems, and algorithmic analytics to improve the customer experience.

However incumbent organisations have a lot of legacy to deal with to achieve this – not just in terms of technology, but organisational structure, business processes, and ingrained thinking.

And importantly, digital transformation goes way beyond technology and is clearly a matter of change management that affects people, processes, organisational structure, and culture as well as customers.

One way the banks are encouraging a change in thinking is by developing next-generation digital workplace strategies. These help win over the hearts and minds of their people, by encouraging collaboration, experimentation, and new ways of working.

Define your core business

Some of the best innovation in financial services is driven by some very unconventional thinking. ‘Will the customer of the future need credit? Will they want to save? What alternatives to banks will they use? Should insurers underwrite losses or pre-emptively protect clients from threats and risks?’ Think tanks that are brave enough to think like this – and then put the uncomfortable answers into action – have to be CEO led.

Fundamentally, we believe you have to decide whether you want to own the platform or the customer experience.

If you think your core business is maintaining the infrastructure for digital financial services, fine, but you’ll have to be the best in the world at doing that if you’re going to make any money out of it.

If on the other hand you decide your core competence is in providing a winning customer experience, then concentrate on developing innovative products that will suit the way customers live in the future. Even then you don’t have to do all the hard work on your own.

It’s unlikely any one organisation will be the best in the world at both.

Make partnering central

Digital innovation is all about doing yourself the few things that only you can do, and leveraging other people’s capabilities for everything else. Blockchain is a great example. While everyone is testing the model, clearly nobody’s trying to build the final solution by themselves. By its very nature it’s a collaborative technology. So it’s fitting that the way it’s being applied to transform the global value exchange marketplace will increasingly become a highly collaborative process with potential access by all participants in the exchange of value and not just the regulated institutions.

Digital innovation is all about doing yourself the few things that only you can do, and leveraging other people’s capabilities for everything else.

A further example of how the industry is embracing cooperation between competitors is the Open Banking initiative. Set up to develop application programme interfaces, security and messaging standards that everybody can use, it involves mainstream banks, as well as challenger banks, fintechs, third parties, consumer groups, and other industry players.

Make collaboration pay

Many of the banks pursue innovation through incubator and accelerator programmes. They support start-ups who are inventing radical new products, rather than developing them themselves. And beyond being a source of free R&D, these relationships provide a sound financial return as the banks benefit as sectors mature and consolidate with high multiplier acquisitions of the start-ups.

Digital transformation seems to be driving a deep shift in the financial services industry in which incumbents are re-inventing themselves, giants are partnering with start-ups, competitors are collaborating with one another, and regulators are increasingly forcing everyone to cooperate.

Where next?

Pingit pioneer, Shaygan Kheradpir, left Barclays to join Juniper, and he’s now CEO of Coriant.x The switch from banking to networking is significant. It tells us that digital technology is now synonymous with innovating the customer experience and staying ahead in financial services.

One might even say that the real transformation is from being a bank with an IT department, to becoming a technology company with a better financial service experience for its customers. Clearly Barclays is well on its way down this journey.